ACE 2006:  AGRICULTURAL ECONOMICS

THE ECONOMY OF BRITISH AGRICULTURE

The practical economics of farming in Britain are well summarised by the traditional aphorisms:

1.    Agriculture in the British Economy  [See also Food Statistics Pocketbook (Defra)]

The British Economy generated and consumed £1200bn in 2006 (GDP - Gross Domestic Product at market prices) (Source: National Income Blue Book).

Total Consumption was £775bn (65%)  of which spending of agri-food, inc. drinks, £156bn, (13%)
Total Government spending was £252bn (21%)
Total Investment was £213bn (17.5%)
Exports £359bn  (Agri-food: £9.9bn (2.75%))
Imports £400bn (Agri-food: £23.5bn (5.87%))

NOTE:  THE RELATIONSHIPS BETWEEN THESE 'MACROECONOMIC' VARIABLES (FLOWS OF SPENDING) ARE IMPORTANT - AND REPRESENTED BY THE CIRCULAR FLOW OF INCOME, which, if you don't already know about, you should follow in the link.

Of this total GDP, the Agri-food sector generated £74bn (6.2%) in Gross Value Added. Of this total GVA, the shares of the links in the British food chain are shown in Figure 1 (source: Agriculture in the UK, 2006, Defra, Chapter 7, The Food Chain).  Agriculture's share of the total GDP is less than half of one percent, at £5.3bn or so.  You should be able to update these figures for yourselves by following the links above (Chart 7.1, Table 7.1 Ag in the British Economy).



Of the 29 million people employed in the UK, only 14% (3.7million) are employed in the agri-food sector, and only 1% (0.49m) are employed in agriculture:  Share of employment in Agri-Food: (Chart and Table 7.3 - AitBE)


Gross Values added per head in the agri-food sector:
Question:  what might account for these differences?  What do we mean by 'value added'?

2.    British Agriculture - the current state. [See Agriculture in the UK, op. cit. Chapter 9 - Accounts]

Output (Revenues):  2006 (prov.)  £17.6bn., made up by:

Inputs (Cash Costs):  £9.2bn., (52% of revenues) made up by:


Leaving a Gross Value Added of £8.4bn (48% of revenues). distributed to resources and factors of production as follows:


Where Total Income from Farming (TIfF) is the remaining income after all other actual costs have been met to provide a return to the owners and operators of the British farm (32% of GVA, or 15% of revenues).

3.   Recent History of British Agriculture

The development of agricultural earnings - 1973 - 2006 (Part 1 - current terms)


So, plenty of growth here, then, with some considerable inter-year variations?  What are we missing?  What do we mean by 'current'?

Development of British Agriculture - Part 2, in Real Terms (using the GDP deflator, basis 2003):


[Note: GDP Deflator: from National Income Statistics,  -and, for the latest figures, see here.

Question:  what are the explanations for this decline in real agricultural activity (in purchasing power terms)?

Answers:
  • As any economy grows richer, so it spends a smaller fraction of total income on food (income elasticities for food generally substantially less than 1);
  • As a consequence, the fraction of national income accruing to the food industry declines;
  • The economic signals of this decline are falling relative (real) prices of food, and falling real incomes in farming;
  • Fewer people can earn a full time living from farming, including those who are trying to sell inputs to farmers
  • The agricultural sector declines in real purchasing power terms, as people find other things to do.
Question:  Can't Policy Make a Difference?
To answer this question, we need a longer term history: British Agriculture's Real Gross Product, 1947 - 2006


Going back to 1947, when the UK government introduced the 1947 Agricultural Act, which guaranteed prices for farm commodities, and made up the difference between these guaranteed prices and market prices with deficiency payments, and then looking at the apparent consequences of Britain's entry to the European Community in 1973, where the UK adopted the CAP (or at least began to acceed to the CAP), it looks as though policy [change] did make a considerable difference, at least to begin with.

But, is the longer term trend decline in Ag. Gross Product more reliable than the shorter term ('CAP') trend?


Question:   What happened in 1973 - and can we learn anything from it? - like what happend in 1995?

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